26ESSDec 4424 1

International Journal of Research in Economics and Social Sciences (IJRESS)
Available online at : http://euroasiapub.org

Vol. 6 Issue 12, December - 2016, pp. 274~284
ISSN(o): 2249-7382 | Impact Factor: 6.225 , | Thomson Reuters ID: L-5236-2015
A STUDY ON DEMONITIZATION OF 500 AND 1000 RUPEE NOTES & ITS IMACT ON
THE VARIOUS SECTORS AND ECONOMY
Girish Shanbhogue1,
HOD,M,com Department
Alvas college , Moodabidri
A. Prashanth Kumar2,
Lecturer, MSNM Besant PG Studies in Management
Bondel, Mangalore
Swathi Bhat3,
Lecturer B.Com Department
Alvas College, Moodabidri
Chethan shettigar4
Assistant Professor, BBM Department

St.Aloysius College, Mangalore
Introduction
Demonetization is the act of stripping a currency unit of its status as legal tender.
Demonetization is necessary whenever there is a change of national currency. The old unit of
currency must be retired and replaced with a new currency unit. This study aims at identifying
the reasons for the withdrawal of the existing notes of Rs. 500 and Rs.1000.the study also makes
an attempt to identify the impact of demonetisation on the various sectors. The study also
highlights the immediate effects on the economy.
OBJECTIVES OF THE STUDY

1. To identify the reasons for the withdrawal of high denomination currency notes
2. To find out its impact on the economy as a whole
3. To study the sector wise impact of demonetisation
4. To identify Measures taken by the government to rectify the imbalances if any
Research Methodology: The data was collected from secondary source of information.
The paper also took help of Secondary data like various newspapers, journals and online data
International Journal of Research in Economics & Social Sciences

274
Email:- editorijrim@gmail.com, http://www.euroasiapub.org
(An open access scholarly, peer-reviewed, interdisciplinary, monthly, and fully refereed journals.)
Vol. 6 Issue 12, December - 2016
ISSN(o): 2249-7382 | Impact Factor: 6.225
base. The collected data was analysed, was interpreted to draw conclusions keeping in mind the
set objectives of the study.
Scope and Limitations: The research study was conducted to identify the problems faced by
government because of the circulation of high denomination notes beyond the required limit.
The study revealed that nearly 87% of the total Indian currency which was in circulation was
high denomination notes of Rs.500 and Rs. 1000. And more over most of fake currency in
circulation was also in high denomination currency notes of Rs.500 and Rs.1000
The limitation of the study is it relied only on secondary sources of data for research analysis.
REASONS FOR DEMONITISATION OF INDIAN CURRENCY

BLACK MONEY
Prime Minister Narendra Modi has promised to bring every penny of black money stashed
abroad back to India. But bringing this unaccounted for money back, or indeed even its
discovery, is a difficult task, leave alone legal intricacies of tax treaties. While previous
governmental efforts have resulted in disparate estimations, some scholars even argue that this
money has been laundered back into India through foreign investments. Here are four charts
that provide a quick recap of the black money problem.
Table no 1
Country Illicit flows

as % of GDP
India 3.11
China 2.97
Brazil 1.49
Russia 8.21
Indonesia 4.16
South Africa 3.85
Estimates of black money in India fluctuate wildly. A World Bank report puts Indias shadow
economy at close to one-fifth of economic output. Another study on illicit financial flows by
Global Financial Integrity (GFI), a non-profit organisation, puts these at 3% of economic output
for India between 2002-11. This difficulty in measurement is because black money is generated
through a raft of complex, sophisticated activities for the purposes of tax evasion, crime and
corruption. This makes it inherently difficult to measure black money accurately.
Some studies exclude certain sources of black money. For example, the GFI excludes criminal
activities and a part of corporate tax evasion, both massive sources of black money. Hence, its
estimates are naturally more conservative. This study also mentions that in the developing

275
(An open access scholarly, peer-reviewed, interdisciplinary, monthly, and fully refereed journal)
world, including India, corporate tax evasion is responsible for 60% of overall black income,
criminal activities are responsible for 35%, while corruption, which has caused much furore in
India, accounts for only 5%. While the reduction in personal income tax rate from nearly 100%
in the 1970s to under 30% now has reduced tax evasion, it has been offset by higher rates of
corporate taxation.
Table no 2
Total money (in Rs. crore) held by Indians in Swiss banks
Year Money
(crores)
2006 41400
2007 27500
2008 15400
2009 12600
2010 12450
2011 14000
2012 9000
2013 14000
There is near unanimous agreement among scholars that most of the black money generated in
India is no more in Swiss banks. They argue that this has either come back as white money to the
country through a process called round-tripping, or has moved into tax havens. A large chunk of
black money might well be invested in real estate and bullion. A 2011 study on foreign direct
investments (FDI) in India by Chalapati Rao and Biswajit Dhar estimates that up to half the
investments could be a result of round-tripping. Money held by Indians as a share of total money
in Swiss banks was 0.29% in 2006 and slipped to 0.13% in 2010, clearly showing that Indians
are not among the biggest clients of Swiss banks.
Table no.3
Year Total Undisclosed

money income
seized admitted
2007 364.64 3612.89
2008 427.82 4160.58
2009 550.23 4613.06
2010 963.5 8101.35
2011 774.98 10649.16
2012 905.61 9289.43

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To curb the menace of black income, Prevention of Money Laundering Act (PMLA) was
introduced on 1 July, 2005. About 1,437 cases had been registered under PMLA till the end of
financial year 2012. Moreover, 23,118 cases had been registered till 31 March, 2012 under
Foreign Exchange Management Act (FEMA), and penalties worth Rs.1,678 crore had been levied.
But that is hardly a drop in the ocean, argue critics.
Clearly, more needs to be done. Perhaps it would be prudent for the government to focus more
on curbing further generation of black money.
TERROR FUNDING
Fake Indian Currency Notes (FICN) network will be dismantled by the demonetisation measures.
Taking out 500 and 1000 rupee notes out of circulation will have a lasting impact on the
syndicates producing FICN's, thus affecting the funding of terror networks in Jammu and
Kashmir, North-eastern states and Naxalite hit states.
As many as 250 out of every 10 lakh notes in circulation are fake, according to a study conducted
by the Indian Statistical Institute. Typically, at any point in time, banknotes with a face value of
Rs 400 crore are in circulation in the country. The study revealed that fake currency notes with a
face value of Rs 70 crore are infused into the system every year, and law enforcement agencies
are able to intercept only a third of them a fact that is acknowledged by the agencies
themselves.
The detection rates of fake 100- and 500-rupee notes were found to be about the same or 10%
higher than the detection rate of 1,000-rupee notes. The study added that fake 1,000-rupee notes
constitutes about 50% of the total value of fake notes.
Pakistans military spy agency, the Inter-Services Intelligence (ISI), has been raking in an annual
profit of around Rs 500 crore by circulating counterfeit notes in India, according to a report
prepared by the IB, R&AW, Directorate of Revenue Intelligence and CBI.
The ISI has been making a profit of 30-40% on the face value of each counterfeit Indian note
produced in Pakistan, according to the report. The cost of printing a Rs 1,000 counterfeit note,
for instance, is Rs 39 (the RBI spends Rs 29 to print a Rs 1,000 note), but it is sold at Rs 350-400,
according to the report. The total fake notes that came into India in 2010 from abroad was
pegged at Rs 1,600 crore, and going by this estimate, the report put the ISIs total profit at Rs 500
crore.

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Table no 4
According to data submitted by the Home Ministry to Parliament on May 3, there has been a
slight decrease in the circulation of fake Indian currency notes (FICN) in the country in the three
years beginning 2013. In calendar year 2015, investigative agencies and RBI seized and
recovered 6.32 lakh fake currency notes with a face value of Rs 30.43 crore. While the number of
fake Indian currency notes was down 10% from a year ago, in value terms, it was down 15% in
the same period. In 2015, various agencies filed 788 FIRs in cases of smuggling and circulation of
FICN, in which at least 816 people were accused. Data show that Delhi and Uttar Pradesh
together accounted for over 43% of recovered and seized FICN in 2015.
As Indians struggle to come to grip with the second de-monetisation of currency since
independence (the previous one was in 1978 and restricted to Rs1,000, Rs5,000 and Rs10,000
notes), the scale and scope of this action is significantly bigger.
The demonetisation move seems to have widespread support from ordinary people; however
there are pockets of hardship despite attempts by the government to exempt crucial needs such
as hospitals, tolls, chemists, crematoria and petrol pumps.
Analysis of the sector wise effect of demonetisation
Real estate
Real Estate will be one of the most affected sectors. Everyone believes the same and hence the
Nifty Realty Index closed at 175.2, down 11.60%.It is a popular bet in the fresh and resale
market dominated by black money holders. The number of buyers will come down and low
demand will bring about lower prices in the short term. However, it will subsequently help in
improving the sectors prospects. Unorganised builders will be most affected and the sector will

278
drag down cement and ceramic sectors also along with it New residential properties will see
lower demand due to negative market sentiment & perceived uncertainty Builders will face a
cash crunch due to sudden drop in sales To attract buyers & maintain sales volume, builders are
expected to introduce attractive offers/freebies & other benefits like never before Builders are
NOT likely to reduce prices .But they will be willing to negotiate on prices with serious buyers
across the table & offer considerable value for the same price (in form of modular kitchen, free
car park etc.). If you are salaried/self-employed and looking to buy your first home, next 6
months is a wonderful opportunity to save big. Your bargaining power with the builder has just
gone up a few notches .Resale & Land segment will see a direct impact from demonetization
since cash component plays a big role in these transactions. Unaccounted cash dominates in
resale & this is what most articles refer to when they talk about demonetization impacting real
estate Demonetization has sucked out most of the unaccounted cash from the system. Affluent
buyers who could pay cash & buy are out of the market. Temporarily! This leaves just the end
users with sufficient loan eligibility in the market. Lower demand would mean pressure on
sellers to reduce prices Sellers with immediate need of money will go for a distress sale & be
ready to sell off at a lower price. If you get hold of such a deal in the next 6 months, you will reap
the rewards in the long term
Gold prices:
As investors rushed to invest in safe havens, Gold Futures touched a high of Rs31,376 and was
trading at Rs30,500 up 2% immediately after demonetization. Local shops have stopped selling
gold in exchange of old notes and prevailing prices are Rs31,800 per 10gm against Rs30,700 per
10gm. The demonetisation move seems to have brightened jewellers fortunes, with many
selling gold at 40-60 per cent premium, against accepting the banned currency notes. Even after
the note ban, gold imports have been strong. According to estimates by GFMS Thomson Reuters,
gold worth $2.8 billion has been imported in the first 17 days of November. Of this,$2.1billion
worth of gold was imported nine days after demonetisation.
In November last year, 98 tonnes of gold valued at $3.54 billion was imported. In October2016,
imports stood at 84 tonnes worth $35billion. Bullion traders are giving multiple reasons for this.
First, the gold market has been destabilised. While gold sold soon after demonetisation was
being replaced to meet marriage season demand, there were income-tax raids on many
jewellers, who were using demonetisation as an opportunity to make money. Donald Trumps
victory in the US Presidential election was considered a bullish sign for gold, too. However, in a
few days after his win, gold prices started falling sharply and traders placed further import
orders at lower prices.

279
The government has started issuing notices to those who have deposited high amounts of
cash. In such cases, clarity is emerging that selling gold against old currency notes with predated
billing practices will stop. However S Subramaniam, CFO of Titan Company contradicted saying
The Indian jewellery market will be the worst hit with the ban on Rs500 and Rs1000 currency
notes. This is due to the preference of shoppers to pay amounts over Rs2 lakh in cash.
Banks:
Banks are the back bone of this entire process and also the biggest beneficiaries. Post complete
exchange of currencies, banks should benefit from higher deposits and transaction volumes,
lower cash handling costs and greater acceptance of digital channels. There are likely to be
secondary benefits for the insurance, asset/wealth management companies through higher
financial savings. While the Nifty closed 1.31% down, Bank Nifty closed higher by 0.09% giving a
confirmation of the same. With demonization, more people are depositing money into the banks.
This means the banks have more liquid funds and more money to lend. Many banks have also
slashed their deposit rates including SBI, ICICI Bank, HDFC Bank.
Canara Bank, ICICI Bank and HDFC Bank have cut their fixed deposit rates by up to 1%.
State Bank of India cut their fixed deposit interest rates by 0.15% on select maturities.
HDFC Bank and ICICI Bank have cut their deposit by up to 0.25%.
United Bank of India has slashed their rates by 1% only on the short-term deposits.
In the banking world, when deposit rates are cut, it generally means the lending rates will also
be slashed down. Since banks are paying lower deposit rates to customers, this allows them
room to charge lesser on loans. Once interest rates come down, this would translate into a
lower EMI. The timeframe for loan rates to come down could take anywhere between 3 months
and 6 months.
Entertainment/Restaurants:
One of the most common areas, where undisclosed income is utilised, is the entertainment and
restaurant industry. There are plenty of restaurants out there that accept Credit and Debit
Cards. Since a majority of the transactions are in cash form in here, it will be exciting to see
how people react to it.
Tourism:
Favourite foreign Tourist Destinations of Indian people like Thailand, Singapore, Malaysia,
Maldives, Hawaii, Vietnam, Sri Lanka, Nepal, China, Indonesia and Dubai will see negative impact
in tourism revenues all black money sponsored trips will come to a halt. Indian Local Tourism
will also get affected as they lose large chunks of the pay-in-cash-only clientele. Illegal foreign
currency conversion is also reported to be badly hit, because they were big acceptors of Rs500
and Rs1000 denomination currency.

280
Luxury items:
will have a drastic negative impact. Majority of the people spend their undeclared income on
such products. After the decision, it is likely that all luxury segments like clothing, electronics,
luxury car, furnishing and allied business will take a hit. Media and hospitality industries are also
likely to get affected.
ON Indian Rupee
After demonetization of Indian currency on 08 nov 2016, rupee has became weaker than
currency of 96 countries or economies. Out of 161 countries currency, rupee has became
stronger than 60 currencies and is at same exchange rate with 5 currencies. If we take data for
past 6 months before demonetization from 08 may 2016 to 08 nov 2016, rupee has became
stronger than 125 currencies. But after 26 days of ban on Rs 500 and Rs 1000 notes, rupee has
became stronger than only 47 currencies.
Rupee has became weaker by 2.66% against US Dollar ($) from 66.40 to 68.17 INR per unit US
Dollar. Rupee has become weaker against some popular currencies like British Pound, Canadian
Dollar and Hong Kong Dollar too. But also became stronger than Euro, Australian Dollar, Swiss
Franc, Singapore Dollar and Japanese Yen.
Period Stronger Weaker Same
After 50 days of demonetization (08-11-16 to 28-12-16) 60 96 5
6 month before demonetization (08-05-16 to 08-11-16) 125 32 4
In Modi government (26-05-14 and 28-12-16) 94 65 2
In Modi govt before demonetization (26-05-14 and 08-11-16) 93 66 2

281
Negative effects of demonetization
1. Rural and semi-rural citizens in India are very cash dependent, lots of people depend on
and regularly use cash for their transaction. Fewer than 20% of Indias approximately
2,15,000 ATMs for instance are in rural centres. So any idea of moving to cashless
transactions any time soon is a pipe dream. Unfortunately many commentators live and
work in rural areas and they can buy even 100 Rs worth of vegetables in a local
supermarket and pay by credit card. Less than 5% of Indians have a credit card. In April
2015 there were only 21 million credit cards.
2. A huge swathe of economic activity will therefore be disrupted. Everything from
marriages, funerals, festivals, purchases of essential goods, discretionary household
consumption will be postponed and or cancelled.
3. A great deal of the wholesale market in agricultural products is conducted in semirural
markets where settlement is in cash. This is not black money. Its just that the people
havent got around to using electronic payments partly because the infrastructure is not
there.

282
4. An unknown number of the un-banked sector who may have sums of money stored away
for a rainy day may be forced to travel to a nearby town to open a bank account to put
the money in before March 2017. They will be subjected to harassment and exploitation
by officials and touts. Some may even lose their money if they cant do it by 30 Dec. For
them its more than a few thousand rupees; it may be their life-savings. As soon as they
can they may well take their money out.
5. Elementary maths shows the gap clearly. Assuming the existing 500s and 1000s are to be
replaced like for like by value, well need 11.4 billion new 500s and 2.54 billion (half of
5.08)to be printed distributed to banks and put into circulation (i.e peoples hands). Not
to mention that there will also be a new 1000 note coming out soon.
6. Heres the killer point: In 201415,- an entire year - the RBI had ordered from the
printing presses the following numbers of currency notes:
INR 500s: 5.4 billion notes
INR 1000s: 1.5 billion notes
7. That means that even if all the printing press capacity was diverted to just 500s and
1000s it would rather more than a year to replace the notes that have been trashed by
the edict of Nov 8th. And you just cant print only high value notes because lower
denomination notes (100s and 50s and 20s and 10s) are not only needed for everyday
transactions but also need to be replaced faster for obvious reasons.
8. To say that the move will migrate a country of 1.2 billion people to the digital payment
infrastructure is more of wishful thinking. Banks dont exist for miles in rural India, India
has an absymally low 1,082 PoS terminal for a million people and digital wallets are
largely an urban phenomenon. To expect such infrastructure to magically appear
overnight to facilitate cash conversion as well as migration to a digital economy is
downright bizzare. Its fairly visible that the ATMs in India cant deal with this, and there
are people dying while trying to withdraw cash.
9. This was neither necessary to root out black money nor is it sufficient. In terms of its
effect on black money it will be at best marginal. In terms of the unintended
consequences the effects will be major especially on the poorer less well educated
un-banked, rural, cash-economy dependent citizens of India who are now queuing up not
for love of country or ruler, but to salvage their own meagre savings.
10. People are already buying and selling the old notes in a parallel black market. People
desperate for cash are already exchanging 500 notes for 400 INR - for the seller of the
new notes its a windfall gain. A lot of wealth will simply be transferred to people who
own legitimate currency and are willing to sell it at a premium.
11. Emphasis on cashless economy ignores the point that not many people have
smartphones in the first place. The government needs to take concrete steps to
ensure the vegetable seller on the streets or kiryana store dont lose considerable

283
business over a long period of time to the richer franchises who have facilities for
PayTM / card readers. Its one thing to lose business due to competitive
disadvantages and another to lose them due to structural disadvantages introduced
by sweeping government changes.
Conclusion
Demonetization was an effort to stop counterfeiting of the current banknotes
allegedly used for funding terrorism, as well as a crackdown on black money in the
country. In the days following demonetisation, banks and ATMs across the country
faced severe cash shortages with severe detrimental effects on a number of small
business, agriculture and transportation. The scarcity of cash due to
demonetization led to chaos and most people holding old banknotes faced
difficulties exchanging them due to endless lines outside banks and ATMs across
India.
Demonetization is a deep psychological strike on Black Money. The move was also
described as an effort to reduce corruption, the use of drugs and smuggling. This
decision was considered as biggest cleanliness drive against the black money in the
history of Indian Economy and we might move towards digital economy.
Demonetization seeks to bring in a sharp, sudden but long lasting behaviour change
that encourages electronic payments. Demonetization is advantageous in short,
medium and long term.
References
www.Business-standard.com (articles dated -November 9, 10, December 30,

January 13)
www.economictimes.com (articles dated-November 9, 10)
www.scribd.com
www.ndtv.com
https://www.quora.com
www.forbes.com/.../one-month-in-whats-the-impact-of-indias-demonetiz...
economictimes.indiatimes.com Markets Stocks News
www.moneycontrol.com News
www.indianeconomy.net/.../what-are-the-impacts-of-demonetisation

284

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International Journal of Research in Economics and Social Sciences (IJRESS)

Available online at : http://euroasiapub.org

Assistant Professor, BBM Department

OBJECTIVES OF THE STUDY

International Journal of Research in Economics & Social Sciences

REASONS FOR DEMONITISATION OF INDIAN CURRENCY

Country Illicit flows

International Journal of Research in Economics & Social Sciences

Total money (in Rs. crore) held by Indians in Swiss banks

Year Total Undisclosed

International Journal of Research in Economics & Social Sciences

International Journal of Research in Economics & Social Sciences

Analysis of the sector wise effect of demonetisation

International Journal of Research in Economics & Social Sciences

International Journal of Research in Economics & Social Sciences

International Journal of Research in Economics & Social Sciences

Period Stronger Weaker Same

After 50 days of demonetization (08-11-16 to 28-12-16) 60 96 5

6 month before demonetization (08-05-16 to 08-11-16) 125 32 4

In Modi government (26-05-14 and 28-12-16) 94 65 2

In Modi govt before demonetization (26-05-14 and 08-11-16) 93 66 2

International Journal of Research in Economics & Social Sciences

Negative effects of demonetization

International Journal of Research in Economics & Social Sciences

International Journal of Research in Economics & Social Sciences

www.Business-standard.com (articles dated -November 9, 10, December 30,

International Journal of Research in Economics & Social Sciences

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